In Defense of the Patent Friendly Court Hypothesis: Theory and Evidence

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This paper studies the puzzle of what caused the surge in US patenting in the 1980s. I first argue that, under the standard view of patents, where value depends only on the appropriable rents created by the patent's exclusive property rights over related technologies and product markets, this puzzle cannot be solved. I then adopt an alternative theory, based on a growing legal literature, where patents confer additional value by minimizing asymmetric information between patentees and observers. Under this view, which has yet to be analyzed by economists, the puzzle can be solved. I relate statistics on patent applications to statistics on patent litigation to describe the puzzle and frame my inquiry. There is strong evidence that these statistics are associated. Time series of US patent applications, new patent litigations and patent litigation outcomes have significant, synchronized structural breaks, and the 1982-83 break dates provide evidence that supports the Friendly Court Hypothesis, the contention that the establishment of the Court of Appeals for the Federal Circuit (CAFC), in 1982, is the source of the surge in patenting. Also, statistics on US patent litigation rates by foreign inventors explain why some foreign inventors' US applications growth did not surge, providing the missing piece of the puzzle. Under the alternative theory of patent value, I show that such a pattern is a predictable outcome of a surge in patent strength. Under the standard view, it is not possible.